Social investing has historically been tied to screening out companies that cross over a range of ethical or environmental boundaries. Over time, the search for negative behavior to add to the list has eclipsed the search for positive traits. The result is a group of portfolios that often fail on two critical counts: They sacrifice real advancement of social change in favor of making a policy statement, and they underperform due to the exclusion of exciting, socially positive companies.
In my firm's view, social investing is not a one-size-fits-all practice. Where negative screening led the way in the past, we apply positive screens
to identify investments that will move social agendas forward.
Our approach has been catalyzed by an increasingly complex global environment in which social investing goes beyond simple black and white arguments. We often look at companies that have long been criticized to see if there is meaningful change in the organization. When expectations are the lowest, the upward swing and motivation can sometimes be the greatest. Whether it is the efforts of McDonald's
(NYSE:MCD) to put healthier food on the table or Monsanto's
(NYSE:MON) efforts to improve crop yields to battle world hunger, these stories open up important discussions in the social investment dialogue, replacing what for decades has been a passionate discourse that was more about screaming and less about listening or learning.
(NYSE:WMT) serves as a prime example. The company still struggles with workplace and employment issues, as evidenced by the recent labor safety questions arising out of the Rana Plaza tragedy in Bangladesh
. For investors who prioritize employment concerns, this may be a nonstarter. For those that are more focused on climate change, they may note that Wal-Mart has emerged as a clear leader on sustainability practices and carbon reduction initiatives. As the largest retailer in the world, it has extraordinary influence across a broad range of industries. Wal-Mart created and is realizing a replicable model for business change that could well be one of the most influential shifts in environmental stewardship in a generation.
noted in a 2012 update:
Wal-Mart deserves praise for its industry-leading sustainability successes, such as improving its fleet fuel efficiency by 69% and becoming the nation's leading commercial buyer of solar energy. The company's most important sustainability initiative -- the pressure it puts on its 100,000 suppliers to improve their environmental performance -- has changed how thousands of products are made, packaged, and sold.
Sustainability will now play a role in its merchants' performance reviews, which help determine pay raises and potential for future promotion.
Influence is a critical aspect of social change. The fact that Wal-Mart uses its vast power as the largest retailer on the planet to pressure suppliers in a positive direction should be supported as a valuable item on a social agenda.
Wal-Mart’s initiatives are born out of top-down leadership and vision, not a simple reaction to regulatory and customer demands. When we examine balance sheets and track records and see that the DNA of a company is built on an authentic commitment from management to address specific social issues, we believe those leadership positions can have an incredible impact on entire industries.
In an era where companies produce sustainability reports that are carefully crafted to meet the pre-set metrics of the proxy services and ESG analysts, we should stand up and pay attention to real leadership when we see it. Such is the case with Wal-Mart’s sustainability initiatives.
It is also a sound investment. Wal-Mart has emerged as the world's largest retailers; its annual revenue of $466 billion is expected to grow in the coming years at an 8% rate in international markets. The company is focused on exploring rising areas of opportunities in order to stay on top. It sees real potential in online retail, projecting it will have online sales of $9 billion in 2013. Another strength lies in cash flow. Wal-Mart increased its free cash flow by 18% in fiscal 2013, sequentially returning $13 billion to shareholders through dividends and share repurchases.
Wal-Mart's enormous global presence, solid financial position, and strong cash flow generation suggest a bright future for the company. The company's CEO commented, "With our core Wal-Mart US business operating so well, our investments in e-commerce, and our international markets focused on growth and improving returns, we are truly the best positioned global retailer."
Competitors have yet to adopt this growth model, and Wal-Mart’s commitment to addressing environmental concerns makes it a key player among retail companies.
All of the specific securities identified in this article are current recommendations of Reynders, McVeigh Capital Management, LLC (“RMCM”) on behalf of its advisory clients. The specific securities identified and described do not represent all of the securities purchased, sold, or recommended for RMCM’s advisory clients and the reader should not assume that investments in the securities identified and discussed were or will be profitable. Past performance is no guarantee of future results.
No positions in stocks mentioned.